<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2004

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from ____________________________ to _________________

                         Commission File Number: 19594

                          INSURANCE AUTO AUCTIONS, INC.
                          -----------------------------
             (Exact name of registrant as specified in its charter)

Illinois                                                              95-3790111
--------------------------------------------------------------------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

Two Westbrook Corporate Center, Suite 500, Westchester, Illinois      60154
--------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip Code)

                                 (708) 492-7000
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

850 E. Algonquin Rd., Suite 100, Schaumburg, Illinois               60173-3855
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)      (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act.)  Yes [ ] No [X]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

Number of shares outstanding of each of the issuer's classes of common stock, as
of October 29, 2004:

            Class                                                Outstanding
            -----                                                -----------
Common Stock, $0.001 Par Value                                 11,547,995 shares

<PAGE>

                                      INDEX

                          INSURANCE AUTO AUCTIONS, INC.

<TABLE>
<CAPTION>
                                                                                              PAGE NUMBER
                                                                                              -----------
<S>                                                                                           <C>
PART I.  FINANCIAL INFORMATION..............................................................       3

Item 1.  Financial Statements (Unaudited)...................................................       3

         Condensed Consolidated Statements of Operations....................................       3
         Condensed Consolidated Balance Sheets..............................................       4
         Condensed Consolidated Statements of Cash Flows....................................       5
         Notes to Condensed Consolidated Financial Statements...............................       6

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.....................................................      11
         Overview...........................................................................      11
         Results of Operations..............................................................      11
         Financial Condition and Liquidity..................................................      13
         Factors That May Affect Future Results.............................................      14

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........................      16

Item 4.  Controls and Procedures............................................................      16

PART II. OTHER INFORMATION..................................................................      17

Item 1.  Legal Proceedings..................................................................      17

Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...      17

Item 3.  Defaults upon Senior Securities....................................................      18

Item 4.  Submission of Matters to a Vote of Security Holders................................      18

Item 5.  Other Information..................................................................      18

Item 6.  Exhibits and Reports on Form 8-K...................................................      18

SIGNATURES   ...............................................................................      19
</TABLE>

                                        2
<PAGE>

                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                       THREE MONTH PERIODS ENDED             NINE MONTH PERIODS ENDED
                                                      ------------------------------        ----------------------------
                                                      SEPTEMBER 26,     SEPTEMBER 28,       SEPTEMBER 26,   SEPTEMBER 28,
                                                         2004              2003                  2004           2003
                                                      ------------------------------        ----------------------------
                                                               (UNAUDITED)                            (UNAUDITED)
<S>                                                   <C>                <C>                <C>             <C>
Revenues:
     Vehicle sales                                    $      7,502       $    8,847          $     22,853    $   32,343
     Fee income                                             53,250           40,280               155,091       126,162
                                                      ------------       ----------          ------------    ----------
                                                            60,752           49,127               177,944       158,505
Cost of sales:
     Vehicle cost                                            6,229            7,299                19,400        28,495
     Branch cost                                            40,157           33,447               118,150        99,256
                                                      ------------       ----------          ------------    ----------
                                                            46,386           40,746               137,550       127,751
                                                      ------------       ----------          ------------    ----------
         Gross profit                                       14,366            8,381                40,394        30,754

Operating expense:
     Selling, general and administrative                     9,239            7,738                26,076        22,415
     Loss/(gain) on sale of property & equipment              (606)               6                  (626)          (24)
     Business transformation costs                               -            1,157                     -         2,875
                                                      ------------       ----------          ------------    ----------

     Earnings (loss) from operations                         5,733             (520)               14,944         5,488

Other (income) expense:
     Interest expense                                          362              521                 1,248         1,079
     Interest income                                           (19)             (25)                  (40)         (117)
                                                      ------------       ----------          ------------    ----------

     Earnings (loss) before income taxes                     5,390           (1,016)               13,736         4,526

Provision (benefit) for income taxes                         2,036             (422)                5,426         1,864
                                                      ------------       ----------          ------------    ----------

         Net earnings (loss)                          $      3,354       $     (594)         $      8,310    $    2,662
                                                      ============       ==========          ============    ==========

Earnings (loss) per share:
     Basic                                            $        .29       $     (.05)         $        .72    $      .23
                                                      ============       ==========          ============    ==========
     Diluted                                          $        .28       $     (.05)         $        .70    $      .23
                                                      ============       ==========          ============    ==========

Weighted average shares outstanding:
     Basic                                                  11,513           11,516                11,532        11,694
     Effect of dilutive securities                             379                -                   284            77
                                                      ------------       ----------          ------------    ----------
     Diluted                                                11,892           11,516                11,816        11,771
                                                      ============       ==========          ============    ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        3
<PAGE>

                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (dollars in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                                               SEPTEMBER 26,      DECEMBER 28,
                                                                                   2004               2003
                                                                               -------------      ------------
                                                                                (Unaudited)
<S>                                                                            <C>                <C>
ASSETS

Current assets:
     Cash and cash equivalents                                                   $  17,810          $  15,486
     Accounts receivable, net                                                       46,832             48,375
     Inventories                                                                    13,237             13,602
     Other current assets                                                            2,769              3,099
                                                                                 ---------          ---------
         Total current assets                                                       80,648             80,562
                                                                                 ---------          ---------

Property and equipment, net                                                         67,866             60,187
Deferred income taxes                                                               10,771              9,788
Intangible assets, net                                                               1,910              2,101
Goodwill, net                                                                      137,494            135,062
Other assets                                                                           481                 93
                                                                                 ---------          ---------
                                                                                 $ 299,170          $ 287,793
                                                                                 =========          =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                            $  39,894          $  36,660
     Accrued liabilities                                                            15,492             11,540
     Obligations under capital leases                                                1,541              2,822
     Income taxes payable                                                            2,221                  -
     Current installments of long-term debt                                          7,547              7,547
                                                                                 ---------          ---------
         Total current liabilities                                                  66,695             58,569
                                                                                 ---------          ---------

Deferred income taxes                                                               19,974             17,748
Other liabilities                                                                    3,103              3,612
Obligation under capital leases                                                        943              1,891
Long-term debt, excluding current installments                                      11,227             16,887
                                                                                 ---------          ---------
         Total liabilities                                                         101,942             98,707
                                                                                 ---------          ---------

Shareholders' equity:
     Preferred stock, par value of $.001 per share
         Authorized 5,000,000 shares; none issued                                        -                  -
     Common stock, par value of $.001 per share
         Authorized 20,000,000 shares; 12,447,414 shares issued and
         11,544,405 outstanding as of September 26, 2004; and 12,325,482
         shares issued and 11,518,273 outstanding
         as of December 28, 2003                                                        12                 12
     Additional paid-in capital                                                    146,538            145,856
     Treasury stock; 903,009 shares at September 26, 2004                           (9,516)            (8,012)
         and 807,209 shares at December 28, 2003
     Deferred compensation related to restricted stock                                (542)              (892)
     Accumulated other comprehensive loss                                             (298)              (625)
     Retained earnings                                                              61,034             52,747
                                                                                 ---------          ---------
         Total shareholders' equity                                                197,228            189,086
                                                                                 ---------          ---------
                                                                                 $ 299,170          $ 287,793
                                                                                 =========          =========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        4
<PAGE>

                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            NINE MONTHS ENDED
                                                                                      -------------------------------
                                                                                      SEPTEMBER 26,     SEPTEMBER 28,
                                                                                          2004               2003
                                                                                      -------------     -------------
                                                                                                 (UNAUDITED)
<S>                                                                                   <C>               <C>
Cash flows from operating activities:
Net earnings                                                                            $  8,310          $  2,662
Adjustments to reconcile net earnings to net cash provided by operating activities:
     Depreciation and amortization                                                         9,724             7,519
     Gain on disposal of fixed assets                                                       (626)              (24)
     Gain on change in fair market value of derivative financial instrument                    -              (307)
     Deferred compensation related to restricted stock                                       350                 -
     Changes in assets and liabilities (excluding effects of acquired
     companies):
     (Increase) decrease in:
       Accounts receivable, net                                                            2,075             5,048
       Inventories                                                                           365              (235)
       Other current assets                                                                  330               813
       Other assets                                                                       (1,437)             (466)
     Increase (decrease) in:
       Accounts payable                                                                    2,999             3,100
       Accrued liabilities                                                                 3,770            (1,254)
       Income taxes, net                                                                   3,464             1,032
                                                                                        --------          --------
         Total adjustments                                                                21,014            15,226
                                                                                        --------          --------
     Net cash provided by operating activities                                            29,324            17,888
                                                                                        --------          --------

Cash flows from investing activities:
   Capital expenditures                                                                  (17,645)          (11,666)
   Proceeds from disposal of property and equipment                                        1,268                60
   Payments made in connection with acquisitions, net of cash acquired                    (1,912)           (7,872)
                                                                                        --------          --------
      Net cash used in investing activities                                              (18,289)          (19,478)
                                                                                        --------          --------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                                    682               492
   Proceeds from term loan                                                                     -            30,000
   Purchase of treasury stock                                                             (1,504)           (8,012)
   Principal payments on long-term debt                                                   (5,660)           (3,782)
   Principal payments - capital leases                                                    (2,229)           (1,874)
                                                                                        --------          --------
Net cash provided (used) by financing activities                                          (8,711)           16,824
                                                                                        --------          --------

Net increase in cash and cash equivalents                                                  2,324            15,234

Cash and cash equivalents at beginning of period                                          15,486            10,027
                                                                                        --------          --------

Cash and cash equivalents at end of period                                              $ 17,810          $ 25,261
                                                                                        ========          ========

Supplemental disclosures of cash flow information:
   Cash paid or refunded during the period for:
     Interest                                                                           $  1,376          $  1,167
                                                                                        ========          ========
     Income taxes paid                                                                  $  2,028          $      -
                                                                                        ========          ========
     Income taxes refunded                                                              $  1,011          $      -
                                                                                        ========          ========
   Non-cash financing activities:
     Property and equipment additions resulting from capital leases                     $      -          $  3,375
                                                                                        ========          ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                        5
<PAGE>

                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    GENERAL

      The unaudited condensed consolidated financial statements of Insurance
      Auto Auctions, Inc. and its subsidiaries (collectively, the "Company")
      have been prepared on the same basis as the annual audited consolidated
      financial statements and, in the opinion of the Company, reflect all
      adjustments necessary for a fair presentation for each of the periods
      presented. The results of operations for interim periods are not
      necessarily indicative of results for full fiscal years.

      As contemplated by the Securities and Exchange Commission ("SEC") under
      Rule 10-01 of Regulation S-X, the accompanying consolidated financial
      statements and related notes have been condensed and do not contain
      certain information that is included in the Company's annual consolidated
      financial statements and notes thereto. For further information, refer to
      the consolidated financial statements and notes thereto included in the
      Company's Annual Report on Form 10-K for the year ended December 28, 2003.

      Fiscal year 2003 consisted of 52 weeks and ended December 28, 2003. Fiscal
      year 2004 will consist of 52 weeks and will end on December 26, 2004.

      Certain reclassifications have been made to the prior year financial
      information to conform to the current year presentation.

      The Company operates in a single business segment - providing insurance
      companies and other vehicle suppliers cost-effective salvage processing
      solutions including selling total loss and recovered theft vehicles.

      Management of the Company has made a number of estimates and assumptions
      relating to the reporting of assets and liabilities and the disclosure of
      contingent assets and liabilities to prepare these financial statements in
      conformity with accounting principles generally accepted in the United
      States of America. Actual results could differ from those estimates.

      Unaudited interim financial statements reflect all adjustments necessary
      to fairly present results for the interim periods reported.

2.    INCOME TAXES

      Income taxes were computed using the effective tax rates estimated to be
      applicable for the full fiscal years, which are subject to ongoing review
      and evaluation by the Company.

3.    COMPUTATION OF EARNINGS (LOSS) PER SHARE

      The computation of basic earnings (loss) per share is made using the
      weighted average number of common shares outstanding during the period.
      Diluted earnings (loss) per share includes the number of additional shares
      that would have been outstanding if the dilutive common shares had been
      issued. The following table sets forth the computation of basic and
      diluted earnings (loss) per share:

                                        6
<PAGE>

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                       NINE MONTHS ENDED
                                       --------------------------------       -----------------------------------
                                       SEPTEMBER 26,      SEPTEMBER 28,       SEPTEMBER 26,         SEPTEMBER 28,
                                            2004              2003                2004                   2003
                                       -------------      -------------       -------------         -------------
                                                       (dollars in thousands except per share amounts)
<S>                                    <C>                <C>                 <C>                   <C>
BASIC EARNINGS (LOSS) PER SHARE:
 Net income (loss)                        $ 3,354           $  (594)             $ 8,310                $ 2,662
 Average basic shares outstanding          11,513            11,516               11,532                 11,694
 Basic net income (loss) per share        $   .29           $  .(05)             $   .72                $   .23

DILUTED EARNINGS (LOSS) PER SHARE:
 Net income (loss)                        $ 3,354           $  (594)             $ 8,310                $ 2,662
 Average basic shares outstanding          11,513            11,516               11,532                 11,694
 Effect of dilutive securities:
   Stock options                              312                 -                  217                     77
   Restricted stock                            67                 -                   67                      -
 Average diluted shares outstanding        11,892            11,516               11,816                 11,771
 Diluted net income (loss) per share      $   .28           $  (.05)             $   .70                $   .23
</TABLE>

4.    GOODWILL AND INTANGIBLES

      The Company performs its annual impairment test during the first quarter
      of each year. This year's annual impairment test did not indicate any
      impairment. Goodwill and other intangibles are recorded at cost less
      accumulated amortization and consist of the following at September 26,
      2004 and December 28, 2003:

<TABLE>
<CAPTION>
                                                             SEPTEMBER 26,    DECEMBER 28,
                                        ASSIGNED LIFE            2004             2003
                                        -------------        -------------    ------------
                                                        (dollars in millions)
<S>                                     <C>                  <C>              <C>
Goodwill                                Indefinite               $137.5          $135.1
Covenants not to compete                5 to 15 years               1.9             2.1
                                                                 ------          ------
                                                                 $139.4          $137.2
                                                                 ======          ======
</TABLE>

      Amortization expense for the nine months ended September 26, 2004 and
      September 28, 2003 was $0.4 million in 2004 and $0.3 million in 2003. This
      amount is included within selling, general and administration expense on
      the Company's Condensed Consolidated Statements of Operations. Based upon
      existing intangibles, the projected annual amortization expense is $0.6
      million for each of the years 2004, 2005 and 2006, $0.4 million for 2007
      and $0.2 million for 2008.

5.    FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

      The Company, as a matter of policy, does not enter into derivative
      contracts for trading or speculative purposes. During the first quarter of
      2002, the Company entered into an interest rate swap to mitigate its
      exposure to interest rate fluctuations and to effectively fix its
      borrowing rate at 5.6%. Under the interest rate swap agreement, the
      Company pays a fixed rate of interest of 5.6% and receives a LIBOR-based
      floating rate. At September 26, 2004, the entire swap agreement qualified
      for hedge accounting.

                                        7
<PAGE>

6.    COMPREHENSIVE INCOME (LOSS)

      Comprehensive income (loss) consists of net earnings and the change in
      fair value of the Company's interest rate swap agreement as follows
      (dollars in thousands):

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED                  NINE MONTHS ENDED
                                          ---------------------------------     -----------------------------
                                          SEPTEMBER 26,       SEPTEMBER 28,     SEPTEMBER 26,    SEPTEMBER 28,
                                              2004                2003              2004              2003
                                           ----------          -----------         -------           -------
<S>                                       <C>                 <C>               <C>              <C>
Net earnings (loss)                        $    3,354          $      (594)        $ 8,310           $ 2,662
Other comprehensive income (loss)
    Change in fair value of interest rate
       swap agreement                              60                  276             530               (15)
    Income tax benefit (expense)                  (23)                (106)           (203)                4
                                           ----------          -----------         -------           -------
Comprehensive income (loss)                $    3,391          $      (424)        $ 8,637           $ 2,651
                                           ==========          ===========         =======           =======
</TABLE>

      The changes in fair value of the Company's interest rate swap agreement
      were due to changes in interest rates.

7.    STOCK OPTIONS

      The Company accounts for its fixed plan stock options under the intrinsic
      value-based method of accounting prescribed by Accounting Principles Board
      Opinion No. 25, "Accounting for Stock Issued to Employees," and related
      interpretations. As such, compensation expense would be recorded on the
      date of grant and amortized over the period of service only if the current
      market value of the underlying stock exceeded the exercise price. No
      stock-based employee compensation cost related to stock option grants is
      recognized in net earnings, as all options granted had an exercise price
      equal to the market value of the underlying common stock on the date of
      grant.

      In 2003, the Company initiated a restricted stock program. Under the
      Company's restricted stock grant program, shares of common stock of the
      Company may be granted at no cost to certain officers and key employees.
      Plan participants are entitled to cash dividends and to vote their
      respective shares received pursuant to the program. Restrictions limit the
      sale or transfer of these shares over a four-year period. The sale and
      transfer restrictions on shares received under the program vest at a rate
      of 25% per year or earlier, on the achievement of certain performance
      based goals. Upon issuance of shares of common stock under the plan,
      unearned compensation equivalent to the market value of the shares at the
      date of the grant is charged to shareholders' equity and subsequently
      amortized to expense over the four-year restriction period. In 2003,
      66,500 restricted shares were granted. Compensation expense in 2003 was
      less than $0.1 million and $0.4 million for the nine months ended
      September 26, 2004. Compensation expense was accelerated by $0.2 million
      in the nine months ended September 26, 2004. There were no forfeitures of
      restricted shares in 2003 and 2004.

      The following table illustrates the effect on net earnings if the Company
      had applied the fair value recognition provisions of Statement of
      Financial Accounting Standards ("SFAS") No. 123, "Accounting for
      Stock-Based Compensation," to the measurement of stock-based employee
      compensation relating to stock options and restricted stock, including
      straight-line recognition of compensation costs over the related vesting
      periods for fixed awards:

                                        8
<PAGE>

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED                        NINE MONTHS ENDED
                                    ----------------------------------       ------------------------------------
                                    SEPTEMBER 26,        SEPTEMBER 28,       SEPTEMBER 26,          SEPTEMBER 28,
                                         2004                2003                2004                  2003
                                    -----------------------------------------------------------------------------
                                                   (dollars in thousands except per share amounts)
<S>                                 <C>                  <C>                 <C>                    <C>
Net earnings (loss) as reported      $     3,354          $      (594)        $      8,310           $     2,662
Add: Stock-based employee
    compensation expense
    included in reported net
    earnings (loss), net of
    related tax effects                      142                    -                  212                     -
                                     -----------          -----------         ------------           -----------
Deduct: Total stock-based
    employee compensation
    expense determined under
    the fair value based method
    for all awards, net of
    related tax effects                     (766)                (388)              (2,029)               (1,252)
                                     -----------          -----------         ------------           -----------
Pro forma net earnings (loss)        $     2,730          $      (982)        $      6,493           $     1,410
                                     ===========          ===========         ============           ===========

Earnings (loss) per share:
     Basic - as reported             $       .29          $      (.05)        $        .72           $       .23
                                     ===========          ===========         ============           ===========
     Basic - pro forma               $       .24          $      (.09)        $        .56           $       .12
                                     ===========          ===========         ============           ===========
     Diluted - as reported           $       .28          $      (.05)        $        .70           $       .23
                                     ===========          ===========         ============           ===========
     Diluted - pro forma             $       .23          $      (.09)        $        .55           $       .12
                                     ===========          ===========         ============           ===========
</TABLE>

8.    RELATED PARTY TRANSACTION

      The Company leases certain properties from a recently resigned member of
      its Board of Directors (the "Related Party"). The Company believes the
      terms of the leases are no less favorable than those available from
      unaffiliated third party lessors. In the third quarter of 2004 and 2003,
      the Company incurred $0.7 million and $0.9 million, respectively, in costs
      to upgrade properties owned by the Related Party. A portion of the
      investment to upgrade these facilities has been funded by the Related
      Party. The Company agreed to modify its future lease payments to take into
      consideration the costs to be funded by the Related Party. The total
      amount of all future rent payments related to the Related Party's funding
      is $2.8 million. The Company also initiated a temporary lease agreement in
      March 2004 to expand the amount of property available at one of the leased
      facilities. The temporary lease agreement does not have a specified term,
      can be terminated by either party upon 30 days written notice, and has an
      annual rental of less than $0.1 million.

9.    COMMITMENTS AND CONTINGENCIES

      The Company leases its facilities and certain equipment under operating
      and capital leases. During the first three quarters of 2004, the Company
      entered into a number of operating leases, including a lease for its
      principal corporate office space.

      In April 2004, the Company entered into a new lease agreement for 38,000
      square feet of space for use as its corporate offices in Westchester,
      Illinois. This lease commenced in September 2004 and expires in August
      2016. The total future rent obligation associated with this new lease is
      $10.3 million. The Company used an allowance totaling $1.9 million from
      the lessor for the build-out of the office space. The Company does not
      expect rent expense related to its corporate office to increase as a
      result of this move.

      As of September 26, 2004, the Company had not entered into any capital
      leases in the current year.

                                        9
<PAGE>

10.   ACQUISITIONS AND DIVESTITURES

      In the third quarter of 2004, the Company acquired Mid-South Salvage LLC
      located in Jackson, Mississippi. The acquisition leverages the Company's
      existing regional coverage in this market. The acquisition was accounted
      for using the purchase method of accounting. The results of operations of
      this acquisition are included in the Company's condensed consolidated
      financial statements from the date of acquisition. The aggregate purchase
      price of this acquisition was $1.9 million, of which 72% is related to
      goodwill.

      In the third quarter of 2004, the Company sold its West Bridgewater,
      Massachusetts facility to Harvey Industries, Inc., a Massachusetts
      corporation, for $1.1 million in cash. The Company recorded a gain on the
      sale of the West Bridgewater facility of $0.3 million, net of taxes.

11.   TREASURY STOCK

      The Company records treasury stock purchases using the cost method of
      accounting. In the third quarter of 2004, the Company repurchased 95,800
      shares of common stock at an average price of $16.17 per share and a total
      cost of $1.5 million. The Company did not repurchase any shares during the
      first and second quarters of 2004.

12.   ACCOUNTS RECEIVABLE

      Accounts receivable consists of the following as of September 26, 2004 and
      December 28, 2003:

<TABLE>
<CAPTION>
                                                 SEPTEMBER 26, 2004         DECEMBER 28, 2003
                                                 ------------------         -----------------
                                                    (Unaudited)
                                                             (dollars in thousands)
<S>                                              <C>                        <C>
Unbilled receivables                                   $ 34,624                   $35,188
Trade accounts receivable                                12,602                    12,787
Other receivables                                           304                     1,213
                                                       --------                   -------
                                                         47,530                    49,188
Less allowance for doubtful accounts                       (698)                     (813)
                                                       --------                   -------
                                                       $ 46,832                   $48,375
                                                       ========                   =======
</TABLE>

      Unbilled receivables represent amounts paid to third parties on behalf of
      insurance companies for which the Company will be reimbursed when the
      vehicle is sold. Trade accounts receivable includes fees and proceeds to
      be collected from both insurance companies and buyers.

13.   PROPERTY AND EQUIPMENT

      Property and equipment consists of the following at September 26, 2004 and
      December 28, 2003:

<TABLE>
<CAPTION>
                                                 SEPTEMBER 26, 2004         DECEMBER 28, 2003
                                                 ------------------         -----------------
                                                    (Unaudited)
                                                             (dollars in thousands)
<S>                                              <C>                        <C>
Land                                                  $  7,662                $   7,582
Buildings and improvements                              10,536                   11,506
Equipment                                               45,629                   39,302
Leasehold improvements                                  49,293                   38,304
                                                      --------                ---------
                                                       113,120                   96,694
Less accumulated depreciation and amortization         (45,254)                 (36,507)
                                                      --------                ---------
                                                      $ 67,866                $  60,187
                                                      ========                =========
</TABLE>

                                       10
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This report contains forward-looking statements that are subject to certain
risks, trends and uncertainties that could cause actual results to differ
materially from those projected, expressed, or implied by such forward-looking
statements. In some cases, you can identify forward-looking statements by use of
words such as "may, will, should, believes, expects, plans, future, intends,
could, estimate, predict, projects, targeting, potential or contingent," the
negative of these terms, or other similar expressions. The Company's actual
results could differ materially from those discussed or implied herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "Factors That May Affect Future Results" below and in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
2003. You should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws, the Company
undertakes no obligation to publish, update or revise any forward-looking
statements, whether as a result of new information, future events, changed
circumstances, or any other reason.

OVERVIEW

      Insurance Auto Auctions, Inc. offers insurance companies and other vehicle
suppliers cost-effective salvage processing solutions on either a consignment or
purchase agreement method of sale. Consignment method sales are consummated
under either a fixed fee or percentage of sale basis. The percentage of sale
consignment method offers potentially increased profits over fixed fee
consignment by providing incentives to both the Company and the salvage provider
to invest in vehicle enhancements, thereby maximizing vehicle selling prices.
Under the fixed fee and percentage of sale consignment methods, the vehicle is
not owned by the Company and only the fees associated with processing the
vehicle are recorded as revenue. The proceeds from the sale of the vehicle
itself are not included in revenue. Under the purchase agreement sales method,
the vehicle is owned by the Company, and the proceeds from the sale of the
vehicle are recorded as revenue.

      The Company has grown primarily through a series of acquisitions and
opening of new sites to now include 77 sites. In January 2004, the Company
established a new facility in Tucson, Arizona. In July 2004, the Company
acquired Mid-South Salvage LLC located in Jackson, Mississippi and established a
new facility in El Paso, Texas.

      The Company's operating results are subject to fluctuations, including
quarterly fluctuations, that can result from a number of factors, some of which
are more significant for sales under the purchase agreement method. See "Factors
That May Affect Future Results" below for a further discussion of some of the
factors that affect or could affect the Company's business, operating results
and financial condition.

RESULTS OF OPERATIONS

Three Months Ended September 26, 2004 Compared to the Three Months Ended
September 28, 2003

      Revenues were $60.8 million for the three months ended September 26, 2004,
up from $49.1 million for the same three month period in 2003. Fee income in the
third quarter increased 32% to $53.2 million, versus $40.3 million in the third
quarter of last year. This increase was due to the Company's continued shift
away from the purchase agreement method of sale, more favorable pricing and an
increase in volumes sold. Vehicles sold under the purchase agreement method
accounted for 4% of the total vehicles sold in the third quarter of 2004, versus
5% for the same quarter last year.

      Cost of sales increased $5.7 million to $46.4 million for the three months
ended September 26, 2004, versus $40.7 million for the same period last year.
Vehicle cost of $6.2 million was $1.1 million less than the $7.3 million
incurred in the third quarter of 2003. This decrease was primarily related to
the Company's shift away from vehicles sold under the purchase agreement method.
Branch cost of $40.2 million increased $6.8 million from $33.4 million for the
same period last year. This increase was primarily the result of higher volumes
of vehicles processed for the quarter and higher per unit tow costs, along with
the impact of new branches opened in 2003 and 2004.

                                       11
<PAGE>

      Gross profit increased 71% to $14.4 million for the three months ended
September 26, 2004, from $8.4 million for the comparable period in 2003. Gross
profit margin increased to 24% for the three months ended September 26, 2004,
from 17% for the comparable period in 2003.

      Selling, general and administrative expense of $9.2 million increased $1.5
million, or 19%, from the $7.7 million of expense incurred during the third
quarter of last year. This increase is primarily due to performance-based bonus
accruals, cost related to compliance with the requirements of the Sarbanes-Oxley
Act of 2002, and higher depreciation on the Company's new information technology
system. Excluding these items, selling, general and administrative expenses
decreased in the third quarter of 2004 compared to the same period last year.
Amortization of intangible assets is now included within this category of
expense and amounted to $0.2 million in the third quarter of 2004 and $0.1
million in the third quarter of 2003.

      There were no business transformation costs for the three months ended
September 26, 2004 compared to $1.2 million in the same period last year.
Business transformation costs included expenses related to data base
conversions, training and other activity related to the roll out of the
Company's new information technology system.

      Interest expense decreased to $0.4 million for the three months ended
September 26, 2004, from $0.5 million for the comparable period in 2003.
Included in interest expense for the three months ended September 28, 2003 was a
non-cash benefit of $0.3 million related to the change in fair value of the
Company's interest rate swap agreement.

      Gain on the sale of property and equipment increased $0.6 million for the
three months ended September 26, 2004 from the comparable period in 2003, due
primarily to the gain recognized on the sale of the West Bridgewater,
Massachusetts facility.

      The Company's effective income tax rate was 37.8% and 41.5% in 2004 and
2003, respectively.

Nine Months Ended September 26, 2004 Compared to the Nine Months Ended September
28,2003

      Revenues were $178.0 million for the nine months ended September 26, 2004,
up from $158.5 million for the nine month period ended September 28, 2003. Fee
income increased to $155.1 million, versus $126.2 million for the nine month
period ended September 28, 2003. This increase was due to the Company's
continued shift away from the purchase agreement method of sale, more favorable
pricing and an increase in volumes sold. Vehicles sold under the purchase
agreement method accounted for 4% of the vehicles sold in the first nine months
of 2004, versus 6% for the same period last year.

      Cost of sales increased $9.8 million to $137.6 million for the nine months
ended September 26, 2004, versus $127.8 million for the same period last year.
Vehicle cost of $19.4 million was $9.1 million less than last year's amount of
$28.5 million. This decrease was primarily related to the Company's shift away
from vehicles sold under the purchase agreement method. Branch cost of $118.2
million increased $18.9 million from $99.3 million for the same period last
year. This increase was primarily the result of additional operating costs
related to new branch facilities.

      Gross profit increased 31% to $40.4 million for the nine months ended
September 26, 2004, from $30.8 million for the comparable period in 2003. Gross
profit margin increased to 23% for the nine months ended September 26, 2004,
from 19% for the comparable period in 2003.

      Selling, general and administration expense of $26.1 million increased 16%
from last year's amount of $22.4 million. This increase is primarily due to
performance-based bonus accruals, cost related to Sarbanes-Oxley compliance, and
depreciation on the Company's new information technology system. Amortization of
intangible assets is now included within this category of expense and amounted
to $0.4 million in 2004 and $0.3 million in 2003.

      There were no business transformation costs for the nine months ended
September 26, 2004 compared to $2.9 million in the same period last year.
Business transformation costs included expenses related to database conversions,
training and other activity related to the roll out of the Company's new
information technology system.

                                       12
<PAGE>

      Interest expense of $1.2 million for the nine months ended September 26,
2004, increased $0.1 million from $1.1 million for the comparable period in
2003.

      Gain on the sale of property and equipment increased $0.5 million to $0.6
million for the nine months ended September 26, 2004, from $0.1 million for the
comparable period in 2003, due primarily to the gain recognized on the sale of
the West Bridgewater, Massachusetts facility.

      The Company's effective income tax rate was 39.5% and 41.2% in 2004 and
2003, respectively.

FINANCIAL CONDITION AND LIQUIDITY

      At September 26, 2004, the Company had current assets of $80.6 million,
which included $17.8 million of cash and cash equivalents. Current liabilities
were $66.7 million. The Company had working capital of $14.0 million at
September 26, 2004, an $8.0 million decrease from December 28, 2003.

      At September 26, 2004, the Company's long-term debt, including current
installments, consisted of $18.8 million borrowed under its term credit
facility. The term credit facility was a one-year revolver that converted on
February 15, 2003 into a four-year term loan carrying a variable rate based upon
LIBOR. The aggregate principal balance of the loan is required be paid in
sixteen consecutive equal quarterly installments commencing on March 31, 2003.

      On March 19, 2004, the Company entered into a Second Amended and Restated
Credit Agreement relating to its senior credit facility. The agreement amends
certain financial covenants, provides that advances made under the facility will
be subject to a monthly asset coverage test equal to 85% of eligible receivables
and requires the Company to provide collateral for amounts due under the
facility in the event it fails to meet certain financial projections for two
consecutive quarters. At September 26, 2004, the Company was in compliance with
its credit agreement covenants.

      Other long-term liabilities include the fair market value on the Company's
interest rate swap along with the Company's post-retirement benefits liability
that relates to the acquisition of USC in 1994. The amount recorded at September
26, 2004 for the post-retirement benefits liability was approximately $2.6
million.

      Capital expenditures were $17.6 million for the nine months ended
September 26, 2004. These capital expenditures consisted of various branch
improvements, including upgrades to existing branches, the development of new
facilities, and continued enhancements to the Company's new information
technology system.

      The Company's Board of Directors authorized the purchase of 1,500,000
shares of the Company's common stock in September 2000 and an additional 750,000
shares in April 2003, for a combined authorization of 2,250,000 shares.
Purchases may be made from time to time in the open market or in privately
negotiated transactions, subject to the requirements of applicable laws, and
will be financed with existing cash and cash equivalents, marketable securities,
and cash from operations. In the first half of 2003, the Company purchased
807,209 shares pursuant to this authorization at an average price of $9.93 per
share, or a total amount of $8.0 million. During the third quarter of 2004, the
Company purchased 95,800 shares pursuant to this authorization at an average
price of $16.17 per share.

      The Company believes that existing cash and cash equivalents, as well as
cash generated from operations, will be sufficient to fund capital expenditures
and provide adequate working capital for operations for the next twelve months.
Part of the Company's plan is to pursue continued growth, possibly through new
facility start-ups, acquisitions, and the development of new claims processing
services. At some time in the future, the Company may require additional
financing. There can be no assurance that additional financing, if required,
will be available on favorable terms.

      The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the related disclosures.
The Company believes the critical accounting policies that require significant
judgments and estimates are related to goodwill, deferred income taxes, and
long-lived assets. For further information regarding these policies, please
refer to the Company's Form 10-K for the year ended December 28, 2003.

                                       13
<PAGE>

SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS

      With the exception of its lease obligations, the Company's contractual
obligations have not changed materially since last reported. In April 2004, the
Company entered into a new lease agreement for 38,000 square feet of space for
use as its corporate offices in Westchester, Illinois. This lease commenced in
September 2004 and expires in August 2016. The Company used an allowance
totaling $1.9 million from the lessor for the build-out of the office space. The
Company does not expect rent expense related to its corporate office to increase
as a result of this move.

      The minimum future rent obligation associated with this new lease is as
follows:

<TABLE>
<CAPTION>
                                                    LEASE OBLIGATION
                                                    ----------------
                                                 (dollars in thousands)
<S>                                                 <C>
2004                                                   $     130
2005                                                         389
2006                                                         528
2007                                                         816
2008                                                         844
Thereafter                                                 7,602
                                                       ---------
                                                       $  10,309
                                                       =========
</TABLE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

      The Company operates in a changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.

      Period Fluctuations. The Company's operating results have in the past and
may in the future fluctuate significantly depending on a number of factors.
These factors include, but are not limited to, the Actual Cash Value ("ACV") of
salvage vehicles, changes in the market value of salvage vehicles, delays or
changes in state title processing, general weather conditions, changes in
regulations governing the processing of salvage vehicles, the availability and
quality of salvage vehicles and buyer attendance at salvage auctions. The
Company is also dependent upon receiving a sufficient number of total-loss
vehicles as well as recovered theft vehicles to sustain its profit margins.
Factors that can affect the number of vehicles received include, but are not
limited to, driving patterns, reduction of policy writing by insurance
providers, which would affect the number of claims over a period of time, and
changes in direct repair procedures that would reduce the number of newer, less
damaged total-loss vehicles, which tend to have the higher salvage values.
Future decreases in the quality and quantity of vehicle inventory, and in
particular the availability of newer and less-damaged vehicles, especially for
inventory disposed of under the purchase agreement method of sale, would have a
material adverse effect on the operating results and financial condition of the
Company. Additionally, in the last few years there has been a declining trend in
theft occurrences. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance. Revenues for
any future quarter are not predictable with any significant degree of accuracy,
and the Company's operating results may vary significantly due to its relatively
fixed expense levels. Due to all of the foregoing factors, it is likely that in
some future quarters the Company's operating results will fall below the
expectations of public market analysts and investors. Any failure to meet
expectations of securities analysts or the market in general could adversely
affect the market price of the Company's common stock.

      Competition. The Company faces intense competition for the supply of
salvage vehicles as well as competition from processors of vehicles from other
regional salvage pools. The Company may encounter further competition from
existing competitors and new market entrants that are significantly larger and
have greater financial and marketing resources. Other potential competitors
include used car auction companies, providers of claims software to insurance
companies, certain salvage buyer groups and insurance companies, some of which
presently supply auto salvage to the Company. While most insurance companies
have abandoned or reduced efforts to sell salvage vehicles without the use of
service providers such as the Company, they may in the future decide to

                                       14
<PAGE>

dispose of their salvage directly to end users. The Company may not be able to
compete successfully against current or future competitors, which could impair
its ability to grow and achieve or sustain profitability.

      Dependence on Key Insurance Company Suppliers. Historically, a limited
number of insurance companies has accounted for a substantial portion of the
Company's revenues. For example, in 2003, vehicles supplied by the Company's
three largest suppliers accounted for approximately 36% of the Company's total
unit sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and
Allstate, accounted for approximately 16%, 12%, and 8%, respectively, of the
Company's unit sales. A loss or reduction in the number of vehicles from any of
these suppliers, or adverse changes in the agreements that these suppliers have
with the Company, could have a material adverse effect on the Company's
operating results, financial condition and quantity or quality of inventory.

      Enterprise-Wide System Redesign Project. The Company developed a new
enterprise-wide application to manage its salvage and auction process. The new
Web-based system is intended to support and streamline vehicle registration and
tracking, financial reporting, transaction settlement, vehicle title transfer,
and branch/headquarters communications. Development and testing of the
enterprise-wide application began in the third quarter of 2001. The Company
began rolling out the new system to its branches during the third quarter of
2002. Though the Company encountered some unanticipated issues during the
implementation phase, which delayed completion of the project and caused the
Company to incur additional costs beyond the project's original estimates, the
Company completed the roll-out of the new system by the end of 2003. However,
there remain inherent risks associated with the application and continued
enhancement of the new system that could continue to adversely impact the
Company's ability to achieve cost savings and increased profitability.

      Governmental Regulation. The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
agencies statutes and ordinances. The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in each
of the locations in which the Company operates. Changes in law or governmental
regulations or interpretations of existing law or regulations could result in
increased costs, reduced salvage vehicle prices and decreased profitability for
the Company. In addition to the regulation of sales and acquisitions of
vehicles, the Company is also subject to various local zoning requirements with
regard to the location of its auction and storage facilities. These zoning
requirements vary from location to location. Failure to comply with present or
future regulations or changes in existing regulations could have a material
adverse effect on the Company's operating results and financial condition.

      Provision of Services as a National or Regional Supplier. The provision of
services to insurance company suppliers on a national or regional basis requires
that the Company expend resources and dedicate management to a small number of
individual accounts, resulting in a significant amount of fixed costs. The
development of a referral-based national network service, in particular, has
required the devotion of financial resources without immediate reimbursement of
these expenses by the insurance company suppliers. The Company may not realize
sufficient revenue from these services to cover these expenses, in which case,
its results of operations may be materially adversely affected.

      Expansion and Integration of Facilities. The Company seeks to increase
sales and profitability through acquisitions of other salvage auction
facilities, new site expansion and the increase of salvage vehicle volume at
existing facilities. The Company may not be able to continue to acquire new
facilities or add additional facilities on terms economically favorable to the
Company, or at all, or increase revenues at newly-acquired facilities above
levels realized prior to acquisition. The Company's ability to achieve these
objectives is dependent on, among other things, the integration of new
facilities, and their information systems, into its existing operations, the
identification and lease of suitable premises, and the availability of capital.
There can be no assurance that this integration will occur, that suitable
premises will be identified or that additional capital will be available to fund
the expansion and integration of the Company's business. Any delays or obstacles
in this integration process could have a material adverse effect on the
Company's operating results and financial condition. The Company has limited
sources of additional capital available for acquisitions, expansions and
start-ups. The Company's ability to integrate and expand its facilities will
depend on its ability to identify and obtain additional sources of capital.

      Volatility of Stock Price. The market price of the Company's common stock
has been and will continue to be subject to significant fluctuations in response
to various factors and events, including variations in the Company's operating
results, the timing and size of acquisitions and facility openings, the loss of
vehicle suppliers or buyers, the announcement of new vehicle supply agreements
by the Company or its competitors, changes in regulations governing the
Company's operations or its vehicle suppliers, environmental problems or
litigation. Any failure to

                                       15
<PAGE>

meet expectations of securities analysts or the market in general could
adversely affect the market price of the Company's common stock.

      Environmental Regulation. The Company's operations are subject to federal,
state and local environmental laws and regulations. In the salvage vehicle
auction industry, large numbers of wrecked vehicles are stored at auction
facilities for short periods of time. Minor spills of gasoline, motor oils and
other fluids may occur from time to time at the Company's facilities and may
result in soil, surface water or groundwater contamination. Petroleum products
and other hazardous materials are contained in aboveground or underground
storage tanks located at certain of the Company's facilities. Waste materials,
such as waste solvents or used oils, are generated at some of the Company's
facilities and are disposed of as non-hazardous or hazardous wastes. The Company
believes that it is in compliance in all material respects with applicable
environmental regulations and does not anticipate any material capital
expenditure for environmental compliance or remediation. To date, the Company
has not incurred significant expenditures for preventive or remedial action with
respect to contamination or the use of hazardous materials. Environmental laws
and regulations could become more stringent over time and the Company may be
subject to significant compliance costs in the future. Future contamination at
any one or more of the Company's facilities, or the potential contamination by
previous users of certain acquired facilities, create the risk, however, that
the Company could incur significant expenditures for preventive or remedial
action, as well as potential liability arising as a consequence of hazardous
material contamination, which could have a material adverse effect on the
Company's operating results and financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      The Company is exposed to interest rate fluctuations on its floating rate
credit facility, under which the Company has outstanding an $18.8 million term
loan. In 2002, the Company entered into an interest rate swap to mitigate its
exposure to interest rate fluctuations, and does not, as a matter of policy,
enter into hedging contracts for trading or speculative purposes. At September
26, 2004, the interest rate swap agreement had a notional amount of $18.8
million on which the Company paid a fixed rate of interest of 5.6% and received
a LIBOR-based floating rate. At September 26, 2004, the entire swap agreement
qualified for hedge accounting. The Company believes that its exposure to
adverse changes in interest rates is not significant.

ITEM 4. CONTROLS AND PROCEDURES

a.    Evaluation of Disclosure Controls and Procedures

      The Company completed an evaluation as of the end of the period covered by
this report under the supervision and with the participation of management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as
amended. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective to provide them reasonable assurances that the
information required to be disclosed in the reports the Company files or submits
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported within the time period specified in SEC rules and forms.

      Any control system, no matter how well designed and operated, can provide
only reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.

b.    Changes in Internal Controls Over Financial Reporting

      During the period covered by this report, there were no significant
changes to the Company's internal controls over financial reporting or in other
factors that could materially affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses. While
there were no significant changes to the internal controls, the Company
completed the implementation of a new enterprise-wide application to manage the
salvage and auction process in the fourth quarter of 2003. The Company continues
to enhance this application, which could materially affect its internal controls
over financial reporting.

                                       16
<PAGE>

PART II. OTHER INFORMATION.

ITEM 1. LEGAL PROCEEDINGS.

      In addition to the legal proceedings described in its Annual Report for
the year ended December 28, 2003, the Company is from time to time subject to
claims and suits arising in the ordinary course of business. Although the
ultimate disposition of such proceedings is not presently determinable,
management does not believe that the ultimate resolution of these matters will
have a material adverse effect on the Company's financial condition, results of
operations or cash flows. The Company maintains comprehensive general liability
insurance that it believes to be adequate for the continued operation of its
business.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

      The Company has never declared or paid any cash dividends on its common
stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company intends to retain any future earnings to finance the growth
and development of its business. In addition, the Company's financing agreement
limits the Company's ability to pay cash dividends to no more than 25% of the
Company's consolidated net income earned over a specified period.

      As of September 26, 2004, the Company had purchased 903,009 shares of
common stock pursuant to Board authorization at an average price of $10.59 per
share. The maximum number of shares that may yet be purchased under the plan is
1,346,991. The Company repurchased 95,800 shares during the third quarter of
2004. The Company records treasury stock purchases using the cost method of
accounting. The following table reflects all purchases of equity securities by
the Company during each month of the third quarter of 2004.

                      ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>
                                                  (c) TOTAL NUMBER OF       (d) MAXIMUM
                (a) TOTAL                         SHARES PURCHASED AS       NUMBER OF SHARES
                NUMBER OF         (b) AVERAGE     PART OF PUBLICLY          THAT MAY YET BE
                SHARES            PRICE PAID      ANNOUNCED PLANS OR        PURCHASED UNDER THE
PERIOD          PURCHASED         PER SHARE       PROGRAMS (1)              PLANS OR PROGRAMS
------          ---------         ---------       ----------------------    -------------------
<S>             <C>               <C>             <C>                       <C>
THIRD QUARTER 2004

July               27,000           $15.99              834,209                  1,415,791

August             68,800           $16.24              903,009                  1,346,991

September               0           $    0                    0                  1,346,991
                   ------           ------              -------                  ---------

Total 2004         95,800           $16.17              903,009                  1,346,991
</TABLE>

      (1) The Company's Board of Directors authorized the purchase of 1,500,000
      shares of the Company's common stock in September 2000 and an additional
      750,000 shares in April 2003, for a combined authorization of 2,250,000
      shares. Purchases may be made from time to time in the open market or in
      privately negotiated transactions, subject to the requirements of
      applicable laws, and will be financed with existing cash and cash
      equivalents, and cash from operations. The Company's repurchase plan
      expires upon the repurchase of all authorized shares.

                                       17
<PAGE>

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable

ITEM 5. OTHER INFORMATION. Inapplicable.

ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.

      (a) EXHIBITS.

            31.1* Certification by the CEO pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

            31.2* Certification by the CFO pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

            32**  Certification by the CEO and CFO pursuant to Section 906 of
                  the Sarbanes-Oxley Act of 2002.

            *  Filed herewith

            ** Furnished herewith.

                                       18
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                 INSURANCE AUTO AUCTIONS, INC.

Date: November 5, 2004           By: /s/ Scott P. Pettit
                                    ---------------------------------
                                 Name: Scott P. Pettit
                                 Title: Senior Vice President and Chief
                                        Financial Officer
                                        (Duly Authorized Officer and Principal
                                        Financial Officer)

                                       19
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT NO.

31.1  Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.

31.2  Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.

32    Certification by the CEO and CFO pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.